The Trickle-Down Effect—Hunting The Other 8%

A recent Preqin study concluded the top 11% of hedge funds by AUM have gobbled up approximately 92% of the industry’s assets. This comes as no surprise as institutional investors continue to favor the largest hedge funds, in part, because of the infrastructure they have in place to safeguard assets. 

What might come as a surprise is an increasing number of large managers are beginning to close their fund to new capital as a way to remain nimble or as one manager with twenty-plus years experience put it, ' to avoid unmitigated compliance processes that can interfere with the purity of speculative contemplation'.

This is where the ‘Trickle-Down Effect’ comes into play.  Large corporate pensions have quadrupled their investments in hedge funds over the past five years; and private-sector pensions now account for nearly one of every five dollars invested in hedge funds globally by institutions, leaping ahead of banks, endowments and insurers as the second-largest buyer.  Together, institutions allocated $18.2 billion in net new capital to alternatives in the first quarter of this year alone.  As the largest funds turn away new capital,  emerging managers are competing for an increasing pool of assets that have trickled-down to the billion-and-below club.  The one stipulation is emerging managers need to pass the ‘PPI Test’—Performance, Pedigree & Infrastructure.

As a start-up in the fintech space, we’ve worked with a number of emerging managers over the past two years.  Across the board, the engagements centered on leveraging modern technology to level the playing field with their larger peers—a strategy that would allow for more fluid discussions with potential investors on performance and pedigree. The critical areas they looked to address included the outsourcing of manual processes to eliminate reporting errors; business continuity and disaster recovery planning; and intra-day portfolio and risk analysis that accounted for changes in the portfolio as they occurred.  And, this applies across the spectrum of managers.  As a $78 billion-dollar manager put it 'in the hedge fund space, the investment in technology has typically been concentrated on front-office tools, with a lack of investment in the middle-office. With investors and regulators driving requirements to capture huge amounts of data from front, middle and back office processes, the wrong technology can result in data discrepancies that cripple the business'.

To get a better understanding of the workflows and services being used by your peers to win assets and address transparency requirements, register for our latest WebEx on July 23rd—it will focus on Raising More Capital with the Right Tools and include a study on an emerging manager that addressed legacy processes and technology to eclipse one billion dollars in assets.